When it comes to predicting how U.S. stocks will fare in 2006, Mark Arbeter is not on the fence.
“We will have a major correction, if not a mild bear market,” says the chief technical strategist at Standard & Poor's in New York, a role he has filled since 1995.
Mr. Arbeter expects the S&P 500, which rose 4.66 points to 1,273.46 Wednesday, will swoon 10 to 20 per cent in 2006 to a low near 1,000. The index will recover only a portion of that slide in a year-end rally and close the year between 1,050 and 1,100.
According to Mr. Arbeter, 2006 will look something like this: The S&P 500 will slump in the first three months of 2006, rise in spring-summer period, get whacked in the fall months and rebound somewhat to finish the year off its lows.
“The typical pattern of bear market lows occurs in September or October, and that is what I expect to see,” he said.
Although Mr. Arbeter is bearish on the prospects for the overall U.S. market, he still likes some “defensive” sectors, such as utilities, health care and commodities, namely oil and gold.
That projected continued strength in commodity stocks bodes well for Canada's benchmark index, which has climbed to a record high on each of the first two trading days of the year after ending 2005 with a gain of 21.9 per cent. That topped the 3-per-cent rise by the S&P 500 and the 0.6-per-cent decline of the Dow Jones industrial average.
“If you ask me whether I think the Canadian market or the U.S. market is going to do better in 2006, I would absolutely without a doubt say the Canadian market,” Mr. Arbeter said.
Mr. Arbeter joins a growing chorus of technical analysts who say U.S. stock markets are in for trouble this year. Knight Capital Group Inc.'s technical analyst Ralph Acampora is calling for equity markets to slump as much as 20 to 25 per cent during the second half. Richard McCabe at Merrill Lynch & Co. Inc. has also warned of the end of the cyclical bull market advance of the past three years.
Like many technical strategists, Mr. Arbeter bases his forecast on cycle analysis. Two cycle lows, the 39-week and the 78-week, are expected to transpire in the first quarter. The last three times these two cycle lows hit their bottoms at the same times — September 2004, March 2003, and September 2001 — indexes hit either a major or an intermediate-term low.
More importantly, the four-year cycle low is set to hit bottom in the fall of 2006. It has come to fruition in every year since 1970, with the exception of 1987, when it came a year late during a market crash.
“The four-year cycle has a strong record of accuracy, in our view, and therefore should not be ignored,” Mr. Arbeter said. “Whether it will work again in 2006 is the question of the year as far as cycle analysis is concerned.”
Mr. Arbeter sees plenty of warning signs. For one, the number of 52-week highs on the New York Stock Exchange are lower than previous ones, which means that investors are being more selective about where they are putting their money.
In another worrisome trend, investment sentiment polls are “extremely bullish” towards the market, he said. People this optimistic have likely already put their allocated funds into the stock market.
“If everyone is sitting on the same fence, it is going to break,” Mr. Arbeter said. “We have seen that time and time again in history.”
